Bond yields climbed early on Friday, but buying soon resumed, and yields ended the day lower on both sides of the Atlantic. The German 10-year yield was trading as low as 1.49% at one point, but could not yet make a sustained break below the important support at 1.50%. The German 10-year yield finally closed lower by some 2bp at around 1.50%, while the corresponding US yield fell by roughly as much.
Intra-Euro-zone spreads widened. Finnish bonds felt only modest pressure after the ratings agency S&P changed its outlook on Finland to negative. Finnish bonds lost around a bp vs the Netherlands in the 10-year sector.
Equities continued to take a beating. S&P 500 lost another 0.95%, and has now retreated by 3% in two days and 4.3% from its record highs. The move lower could easily have more to run. Asian equities are trading mixed this morning, while Europe is set to open down.
On the back of more easing discussion from ECB Governing Council members over the weekend (see more below), the German 10-year yield is set to finally break the 1.50% support today. Long positions in bonds are thus the way to go today.
ECB fights the stronger currency with words – and talks further about QE
The ECB’s Draghi said over the weekend that the strengthening of the exchange rate would require further monetary policy accommodation, though he did not want to give a trigger level for action. The ECB has been much more open in its comments about the exchange rate lately, illustrating the increasing concerns the stronger euro is causing inside the central bank. In the near term, a rate cut, including a negative deposit rate, is the most likely weapon the ECB would use to combat further strengthening. Mr Draghi would be happy, though, if verbal intervention was enough, and the euro has actually weakened some this morning. Nevertheless, words are unlikely to suffice to stop the euro strengthening, putting more pressure on the ECB to act.
The ECB’s Cœuré, in turn, talking about asset purchases, said purchases would naturally be linked to the interest rate maturities that are most important for firms’ and households’ investment and consumption decisions. In the euro area, this tends to be the intermediate to longer part of the yield curve. His comments thus imply that any ECB asset purchases would target longer maturities as well, not only short bonds like the Outright Monetary Transactions programme.
LTRO payments continue coming in – ECB more concerned about the rising euro
Though the flow of early LTRO repayments is showing plenty of volatility on a weekly basis, the payments continue. This week, banks will repay another EUR 8.3bn, contributing to a gradual tightening of the liquidity environment. Falling excess liquidity will gradually increase upward pressure on the overnight rate, but at the moment, the ECB is likely to be more worried about the recent re-strengthening of the euro.
US retail sales & inflation, Chinese GDP and corporate earnings ahead
The highlights in this week’s calendar include US March retail sales today at 14:30 CET, US March inflation tomorrow, and Chinese Q1 GDP on Thursday. The week will be a holiday-shortened one, though, due to Easter holidays.
The flow of corporate earnings reports, in turn, will pick up, with 54 S&P 500 companies due to report during the week.
In addition to US retail sales, today’s calendar includes Euro-zone February industrial production at 11:00 CET, and speeches by the Fed’s Tarullo and the ECB’s Noyer at 18:45 CET.
New French 2-year benchmark out this week
After last week’s heavy supply, this week’s calendar looks somewhat calmer. Germany will re-open its 10-year benchmark for EUR 4bn on Wednesday. France, in turn, will auction a new 2-year benchmark as well as tap a 5-year bond for a combined EUR 7 to 8bn, while it will also sell inflation linkers for EUR 1 to 1.5bn on Thursday. The US, in turn, will sell USD 18bn of 5-year TIPS on the same day.
Nordea